Asset management is a very competitive market, especially for small and medium size operators. Even if you have developed a successful investment / trading strategy, marketing this as an investment opportunity to new clients can be tricky. Advertising and client acquisition is one thing, and we are not covering it here, but an important element is making the investment for potential clients as smooth and comfortable as possible. One way of letting your customers comfortably invest into a trading strategy is to offer them to buy into a fund – but that works if you are operating a fund management license and have the full infrastructure required for that. Not all asset managers do. So a different solution, equally comfortable for customers, is to have the trading strategy presented to them in the form of a security – the one they can easily buy through a broker or a bank, by ISIN number.

So, for asset managers and trading strategy developers (including strategies based on fully automatic algorithms), expanding the investor base often hinges on the accessibility and familiarity of the investment vehicle offered. We assist firms in this expansion by enabling them to offer easily investable, globally cleared, exchange-traded securities as ‘wrappers’ for the strategies they manage. This process involves the securitization of the trading strategy’s underlying assets.

The Necessity of Securitization for Trading Strategies

Securitization in this context is primarily a mechanism to streamline the raising of funds and broaden investor reach.

Increasing Investor Base and Market Access

A core reason for securitizing a trading strategy is to provide potential investors with an optimal investable product. Many investors, particularly institutional ones or those seeking simplified portfolio administration, prefer holding a standard security rather than entering into direct managed account agreements or investing in complex, non-exchange-traded fund structures. By converting the strategy into a security, we make it:

• Easily Investable: Investors can buy, hold, and redeem the strategy via standard brokerage accounts.
• Globally Cleared: Admission for clearing into systems like SIX-SIS, Euroclear, and Clearstream facilitates global distribution.
• Exchange-Traded: A potential exchange listing (e.g., on an EU exchange) provides transparency and added accessibility, although it rarely creates a liquid market in your securities all by itself.

Addressing Regulatory and Infrastructure Gaps

Securitization, through the use of a dedicated Special Purpose Vehicle (SPV), offers solutions for strategy developers who may lack traditional financial infrastructure:

• For Regulated Managers: If the asset management firm is regulated, the SPV raises funds by issuing securities and becomes the client of the regulated firm, which then implements the strategy.
• For Non-Regulated Strategy Developers: A significant number of algorithmic trading professionals and developers come from backgrounds in software, mathematics, or other fields, and naturally lack the regulated investment market infrastructure and cannot afford its high cost. Yet, they possess valuable trading strategies and a pool of interested investors. Several jurisdictions permit arrangements where the strategy developer can implement trading strategies for the securities-issuing SPV without being categorized as a Collective Investment Scheme or a fully licensed asset manager. This flexibility allows small teams with demonstrated consistent returns to create and offer transparent, simple-to-transact securities to their investors.

In essence, securitization provides a regulatory and operational ‘wrapper’ that separates the strategy’s operation from the investment vehicle, thereby providing necessary infrastructure and compliance frameworks.

Instruments Used for Securitization

The securitization of trading strategies is achieved through the issuance of a diverse range of securities, issued by a dedicated SPV in the jurisdiction best suited to the fundraise parameters.

These securities are configured optimally for the strategy and client base. The underlying asset for these securities is the capital raised from investors and the assets purchased using that capital.

Key instruments utilized include:

• Actively Managed Certificates (AMCs): Extremely popular, particularly within the Swiss framework, AMCs are debt instruments where the value is linked to an underlying actively managed portfolio. They offer high flexibility for changes in the underlying strategy and portfolio composition.
• Strategy Notes: General term for debt instruments specifically linking performance to an underlying trading strategy.
• Tracker Certificates: Designed to track the performance of a specific index or, in this context, the returns generated by the underlying trading strategy.
• Underlying-Linked Notes, Portfolio-Linked Notes, Performance-Linked Notes or Bonds: These instruments offer various degrees of link specificity, tying the security’s payoff to the performance of the strategy’s investments.

Islamic Finance Alternative

For Shariah-compliant investing, we utilize a special type of instrument: the Sukuk Al-Wakala Bi Al-Istithmar. This is an Islamic finance equivalent of the Actively Managed Certificate, structured based on the Wakala (agency) principle to align with Shariah investment requirements.

Before embarking on the creation of this type of security the structurer must always make sure that the underlying investments (the portfolio) and the trading style does not run counter with Shariah principles. Most importantly, there should be no fixed-income instruments in the portfolio, the issuers of portfolio securities must not be companies engaged fully or predominantly in Shariah-prohibited business (e.g., conventional banks, arms manufacturers etc.), and the trading strategy must not use derivatives in a speculative way (using non-Shariah-compliant derivatives for pure risk hedging is a debatable topic among scholars specializing in Islamic finance).

Implementation Setup

A common arrangement, often seen in our typical Swiss solution, involves the issuance of an Actively Managed Certificate or another strategy-backed security with a Swiss ISIN, followed by its admission for clearing into major systems like SIX-SIS, Euroclear, and Clearstream.

While effective, we also recognize that smaller managers with only a few million USD to raise may find the costs of the established Swiss setup high for their operation. We offer tailored solutions for such managers in other jurisdictions to ensure cost-effectiveness remains aligned with the scale of their fundraise.